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For proponents of sales taxation, recently released re-caps of 2007-2008 revenue collections and the revenue summary for the first couple of months of the 2008-09 year makes for sobering reading. It is a further reminder, if we needed one, of the instability of sales tax revenue.

Sales tax collections for 2007-8 came in at a little under $76 million below the forecast. That's a baseline growth of 1.7% versus the forecasted 2.9%.

The report come from Barry Boardman, Economist at the Fiscal Research Division of the General Assembly.

By comparison, net collections of income tax outperformed expectations and grew by 3.8% or $7.2 million more than expected. Growth of 3.7% was forecast. Corporate taxation came out ahead of expectations, too.

Sale taxation collection took a hammering in the last quarter of 2007-08. During the first half of summer in 2008, consumer spending in North Carolina dropped as gas prices and the housing crisis crunched household budgets. The result? Sales tax collections were down almost 4% on the same summer period in 2007.

The bad news has continued for sales tax collections in the first two months of 2008-09, July and August. Collections show a decline of 0.1% compared to the same period last year. To be sure, withholding income tax collections aren't seeing great growth but they easily outperformed sales tax collections in July and August, with 3% growth on the same period last year.

When it comes to sales taxes, the lesson should be clear: don't bank on the money being there.

4 Comments

gregflynn

September 25, 2008 at 11:42 am

It would be hard to find “proponents of sales taxation”. In NC it is an essential supplement to personal and corporate income tax at the state level and property tax at the local level. Its volatility is due in part to the narrow tax base and could be tempered by broading the base to include services and internet sales.

George Bush recently pointed to Ireland’s low corporate income tax rate relative to the US but he failed to mention that Ireland has a Value Added Tax (VAT) rate of 21% on most goods and services including internet sales. The EU mandates a minimum member state VAT rate of 15% up to a maximum of 25%.

You’re right, Greg, that there are few people who love the sales tax, but Steve’s point is also valid. To the extent anyone’s ever willing to talk about tax hikes at all, it’s always the sales tax that gets pushed out there. This is currently the case in the transportation policy debate at the General Assembly where no one is willing to discuss any other revenue source.

The sad thing — which you both allude to — is that even with regular hikes in the sales tax rate, the actual revenue raised is declining due to the fact that we apply the tax to less and less of our economy.

Bottom line: We need to broaden the sales tax base to keep it resilient and up-to-date, even as we consider other revenue sources to make sure that we can continue to keep our key public structures and institutions fully functional.

gregflynn

September 25, 2008 at 4:59 pm

The volatility is based on one quarter of decline and sales tax revenue observed almost in real time. Withholding revenue is stable and non-withholding revenue is somewhat inflated by April 15th payments. The report notes that:

The first months of the fiscal year are the least important months as an indicator of revenue trends for the fiscal year

and

Volatile revenue sources (corporate income, non-withholding personal income tax), do not show up until the second half of the fiscal year.

We certainly need more diversity in our revenue streams, not just to reduce volatility but also to spread the burden more fairly.

I’ve come across plenty of promoters of sales taxation in recent months…

Yes, the first couple of months are the ‘least important’ but read in the context of the fact that both income and corporate tax collections outperformed expectations in the 07-08 year while sales tax collections did not, is but further evidence of what many tax analysts have said for a while: sales tax revenue is unstable. Don’t count on it.

Rob and you are right – the sales tax base needs broadening. You are right, we need more diversity in our revenue streams to increase fairness. Doubling down on the current sales tax isn’t going to get us there.